Board performance indicator development

In the previous section the definitions and issue of validity and taxonomy generally around performance indicators were examined. This section considers the practical and pragmatic issues associated with establishing performance indicators for a board’s corporate governance activities.

What is evident from the literature presented in both this chapter and the previous chapter is the potential difficulty in arriving at objective notions of performance for board’s activities because:

1. not-for-profit organisation performance is often not easily judged or measured 2. the nexus between the not-for-profit organisation performance and the boards

performance is often not clearly established

3. the factors and activities of an effectively performing board and indeed the notion of corporate governance is continually developing, thus resulting in effective not-for-profit organisation performance which is varied, multifaceted and difficult to measure.

Perhaps the first issue to consider when developing such performance indicators is the question of who should establish them. There are two schools of thought as to who can best establish the measurement criteria. On the one hand, it may be argued that external experts are the only ones with sufficient objectivity and expertise. On the other hand, it may be argued that only the board itself is capable of comprehending and understanding the range of factors impacting on its own performance. The protagonists for the experts argue that boards generally think they are doing a good job. If they did not, they would do something about it, thus the criteria against which they will choose to be assessed will be inadequate. Clearly, it is possible to combine the approaches and the approach that the present researcher favours: an external person facilitating the board to establish its own performance criteria.

The previous section noted the range of views in defining performance indicators and their various guises. A decision at some point in time needs to be made as to the extent of the adherence to such taxonomies that shall be imposed. This decision is likely to be made by the external person, the board itself, or a combination of both. Having decided who will take the key decisions in the establishment of such performance indicators, the next decision is the methodological approach to be carried out in developing them. Walsh (1996, p.511) made the general observation in 1996 that ‘current approaches to key performance indicators tend to be constructed in a “piecemeal fashion”, lacking an integrating framework’. Some approaches appear unplanned and accidental, emanating from:

• outcome measurement – an approach that seeks to satisfy users, such as managers, investors, etc. needs for indicators by which to judge performance, described by Walsh as ‘edicts from above’

• quality systems – an approach driven from the quality systems movement of measuring input and outputs.

For those authors who advocate a more deliberate approach to the construction of performance indicators, many have advocated that these indicators should be aligned with the strategy of the organisation (The Society of Management Accountants of Canada 2002; Kaplan & Norton 1996; Tovey 2001; Wall & Martin 2003). They should at least have an eye to the organisation’s strategy (Epstein & Roy 2004). Tovey (2001) said that performance indicators are developed from critical success factors identified in the organisation’s strategic and operational plans. It is accepted that strategies are ‘the means by which an organisation has decided that its aims can be achieved’ (Otley 1999, p367). There can be little doubt that the development and implementation of strategies is an important source in setting a board’s performance measure. Beyond factoring in strategy, there is, however, a range of views expressed on what other grounds performance indicators should be based. The literature variously suggests that the strategy dimension ought to be coupled with either a critical success factor approach or processes approach.

The critical success or key results approach establishes measures focusing on the factors or areas that are most crucial for the continued success of the organisation

(Parmenter 2007; Schneier, Shaw & Beatty 1992; Tovey 2001). Similarly, The Society of Management Accountants of Canada (2002) sought to identify key success factors. Walsh (1996) observed that outcome based measures are lag indicators and they are difficult to manage without understanding the factors influencing them. Walsh (1996), whilst not objecting to the inclusion of outcome measures, stated that the focus of improvement efforts should be on the drivers. Further, he argued that these can be identified by examining the processes that influence the desired outcome. It has been previously acknowledged that corporate governance is a system; therefore it would seem logical that at least some of the critical success factors or key result areas may be process related. This view implies that business processes ought to be identified before performance indicators are developed, and that those performance indicators should be aligned primarily with processes (Zwikael & Globerson 2006) or traceable to key business processes. Thus each key business process should have at least one key performance indicator (Walsh 1996). Implicit in this approach is the concept of program logic models where a logical model of an actual process is derived (Poister 2003).

The Productivity Commission (2010) in its most recent study of contributions in the not-for-profit sector proposes a measurement framework which is consistent with a process view of corporate governance (see section 2.3) and depicted in figure 2.3. This approach adapted from the United Way of America (1996, p.11) called for the consideration of program logic and proposed eight non-sequential steps to developing a system for measuring program outcomes, which are:

• get ready

• choose the outcomes you want to measure • specify the indicators for your outcomes • prepare to collect data on your indicators • try out your outcome measurement system • analyse and report your findings

• improve your system • use your findings.

The Society of Management Accountants of Canada (2002) also identified elements bringing into play a board’s activities, effectively acknowledging the role process plays. This thesis has introduced a range of perspectives from which one can approach developing performance indicators, which include being planned, incorporating strategy, critical success factors, key result areas and processes. No doubt each of these approaches would deliver different performance indicators. Given the infancy of board performance indicator theory and research, none of these approaches has been proven superior to any other; it is no wonder then that some practitioners look to a range of indicators.

A discussion of development approaches for performance indicators would be bereft without examining Balanced Scorecard categories, which attempt to achieve:

…balance between external measures and for shareholders and customers, and internal measures of critical business processes, innovation, and learning and growth. The measures are balanced between outcome measures – the results from past efforts – and the measures that drive future performance (Kaplan & Norton 1996, p.10).

Similarly, Epstein and Roy (2004, p.2) advocated ‘careful attention to both inputs and process’, but also output and outcome, and they developed an approach from, amongst other things, existing, corporate governance codes. Of course, such an approach assumed that the structural imperatives built into the prevailing corporate governance codes were valid and complete.

Performance metric luminaries, Kaplan and Norton (2006, pp.200, 208), observed the ‘emerging new application’ of using the Balanced Scorecard by boards of directors to enhance corporate governance processes, describing the approach as ‘novel’. Kaplan and Norton (2006, p.200) advocated using Balanced Scorecards for board annual performance assessment. According to these authors ‘the use of the Balanced Scorecard by boards of directors is an emerging new application, although one that [they] feel will increase over time’. Walsh, Lok and Jones (2006, p.3) argued that the Balanced Scorecard drove a recent transformation in performance management, which is founded on the belief that ‘measurement drives behaviour’ and ‘key

performance indicators are needed to focus all the individuals in an organisation on the vital aspects of its operation’.

Interestingly, the policy corporate governance advocate Carver (2001) cautioned boards in adopting specifically the Balanced Scorecard as a tool for their own assessment, due to the categories that too closely mimicked management rather than corporate governance. Carver’s (2001) caution seemed to apply to the areas evaluated by the Balanced Scorecard rather than directed at performance indicators generally. In section 3.2.3 the matter of performance standard was outlined, that is judgement concerning the appropriate standard and the achievement of that standard. In this regard decisions discussed earlier in this section, concerning who should establish the measurement criteria, what level of taxonomy is required and the method used to establish the performance indicators are critical. Finally and similarly to the issue of performance standards, the concept of a necessary but not sufficient condition needs to considered; for example, it is necessary to attend board meetings but that alone is not sufficient because one needs to be prepared, engaged and contribute to these meetings. Given the complexity of corporate governance, corporate governance practitioners must be mindful of the adequacy of any corporate governance performance indicators selected and the limitations inherent in such performance indicators.